How Does Firm Capital Mortgage Investment's (TSE:FC) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Firm Capital Mortgage Investment (TSE:FC) share price has dived 31% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 27% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

View our latest analysis for Firm Capital Mortgage Investment

Does Firm Capital Mortgage Investment Have A Relatively High Or Low P/E For Its Industry?

Firm Capital Mortgage Investment's P/E of 9.60 indicates some degree of optimism towards the stock. The image below shows that Firm Capital Mortgage Investment has a higher P/E than the average (6.4) P/E for companies in the mortgage industry.

Its relatively high P/E ratio indicates that Firm Capital Mortgage Investment shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Firm Capital Mortgage Investment increased earnings per share by 2.2% last year. And earnings per share have improved by 1.2% annually, over the last three years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Firm Capital Mortgage Investment's Balance Sheet Tell Us?

Firm Capital Mortgage Investment has net debt equal to 45% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Firm Capital Mortgage Investment's P/E Ratio

Firm Capital Mortgage Investment's P/E is 9.6 which is below average (10.6) in the CA market. The company does have a little debt, and EPS is moving in the right direction. If you believe growth will continue - or even increase - then the low P/E may signify opportunity. Given Firm Capital Mortgage Investment's P/E ratio has declined from 13.9 to 9.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Firm Capital Mortgage Investment may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.